Take-Two Interactive Software Inc (TTWO) 2009 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Take-Two Interactive Software fourth quarter and fiscal 2009 conference call.

At this time, all participants are in a listen-only mode.

A brief question-and-answer session will follow the formal presentation.

(Operator Instructions).

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Cindi Buckwalter, Executive Vice President for Take-Two Interactive.

Thank you.

Ms.

Buckwalter, you may begin.

Thank you.

Welcome, and thank you all for joining us today for our fourth quarter conference call.

Today's call will be led by Strauss Zelnick, Chairman of Take-Two; Ben Feder, our CEO; and Lainie Goldstein, our CFO.

Our team will be available to answer your questions during the Q&A session following our prepared remarks.

Before we begin, I'd first like to quickly review our Safe Harbor statement by reminding everyone that the statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws.

These forward-looking statements are based on the beliefs of our management, as well as assumptions made by and information currently available to us.

We have no obligation to update these forward-looking statements.

Actual operating results may vary significantly from these forward-looking statements based on a variety of factors.

These important factors are described in our filings with the SEC, including our 10-K for the fiscal year ended October 31, 2008, and our 10-Q for the third quarter ended July 31, 2009.

These documents may be obtained from our website at www.taketwogames.com.

Now I'll turn the call over to Strauss.

Thanks, Cindi.

Good afternoon, everyone, and thanks for joining us.

Today, we'll review our financial results for the fourth quarter, highlight some recent product accomplishments, and provide more information about our lineup and our outlook for fiscal 2010.

Our fourth quarter results were in line with the updated guidance that we provided earlier this month.

2009 was clearly a challenging year for our Company and for our industry.

The November NPD data released last week showed an 8% year-over-year decline in hardware and software sales for the month, and a 12% decline year-to-date.

That said, we're excited about our strong 2010 lineup, which includes sequels to four of our proven and highly successful franchises.

BioShock 2, Mafia II, Max Payne 3, and Red Dead Redemption.

We believe Take-Two is stronger today than at any time in its past -- notwithstanding our outlook for the fiscal year.

We've always had outstanding talent, and that talent is now focused on a more diverse range of products, a greater number of platforms, and additional geographic regions.

Our creative teams are the best in the business at creating AAA titles that are winners with critics and consumers.

Our financial position is solid.

We're well aware that we have to focus on better execution, and we've made that one of our top priorities for the coming year.

We'll continue to enhance our core business by selectively expanding into growth areas such as digital distribution, downloadable content, micro-transactions, the iPhone platform, and emerging markets in Asia.

These and other initiatives provide opportunities to expand our key franchises and build our audiences.

We'll also continue to evaluate diligently our cost structure, and better align our resources to enhance efficiencies and improve execution.

And our management team remains committed to operating our business profitably in the future.

Now I'll turn the call over to Ben, who will provide more detail about our fourth quarter results, operations, products, and roadmap for the coming year.

Thank you, Strauss.

Our fourth quarter results were in line with our updated guidance.

Sales for the quarter were led by Borderlands, NBA 2K10, and our Grand Theft Auto titles.

I'd like to discuss some of our recent product highlights.

Borderlands has now sold over 2 million units worldwide and has firmly established itself as a key franchise for Take-Two.

The game has been widely regarded as one of the best new IPs in our industry, as well as one of the best games published in 2009.

Borderlands recently won IGN's award for best PC shooter of 2009; was named one of the top five titles of 2009 by Time magazine; and was also named one of the top 10 titles of 2009 by the Associated Press.

We have long-term publishing rights for this brand.

We're very proud of the teams at 2K and Gearbox, who delivered a fantastic product, and did an excellent job developing and marketing the title.

We released our first downloadable content for the game a month after launch, and last week, announced that our second downloadable offering will be coming soon.

We believe the leveraging, launch marketing, and initial consumer excitement are key factors in delivering meaningful, downloadable content that deepens brand loyalty and keeps gamers engaged for long periods of time.

2K Sports once again delivered the number one rated and the number one selling basketball game in our industry, with NBA 2K10.

Our market share in basketball is unrivaled and growing.

The team at our Visual Concepts Studios continues to set new benchmarks with this franchise, and their passion is evident in the game's critical acclaim and success.

The marketing for the title has been equally impressive, and NBA 2K10 was recently heralded as one of America's hottest brands by Advertising Age.

This past weekend, Rockstar Games, Grand Theft Auto, the Ballad of Gay Tony, and Grand Theft Auto Chinatown Wars won awards for Best DLC and Best Handheld Game at the 2009 Video Game Awards that aired on Spike TV.

We're very proud of the teams behind these titles and the awards that honor their creativity, innovation and commitment to excellence.

Our internally-owned and developed Carnival Games franchise has also reached a milestone, achieving over 5 million units sold worldwide.

We'd like to congratulate our Cat Daddy Games studio and 2K Play for delivering one of the industry's most successful family entertainment titles that continues to attract new audiences on the Wii NDS.

Civilization Revolution, our first offering for the iPhone and iPod Touch was ranked by Apple the ninth Highest Selling Game of 2009.

Proven brands appear to be driving game sales on this platform and are maintaining their premium pricing well after launch.

We're continuing to selectively bring our IP to this platform, and last week, we launched Beaterator and we'll release Grand Theft Auto Chinatown Wars shortly.

Building upon the success of our Civilization franchise, its creator Sid Meier announced the development has already begun on Civilization network -- our first social gaming title for Facebook that is planned to launch in 2010.

We're excited to enter this new category of gaming and are pleased to have Sid working on our initial offering.

Moving on to fiscal year 2010.

Our view of the retail environment and overall economy hasn't changed since our update earlier this month.

And as Strauss said before, our industry continues to experience year-over-year declines.

We remain cautious with respect to consumer spending for the balance of this holiday season, and believe that the retail environment may continue to be challenging in 2010.

We've assumed that our US retail partners will continue to be conservative with their initial product orders.

Our fiscal 2010 forecast reflects a prudent outlook on the business, as well as the best information reasonably available to us at this time.

Our guidance doesn't assume any improvements in overall market conditions nor the possibility that one or more of our AAA titles will exceed our initial projections.

Similarly, we haven't incorporated any additional cost savings into the current guidance, and are focused on identifying a variety of opportunities that could positively affect our performance.

I also want to emphasize that we have a great lineup of AAA titles for this year.

We'll continue to build upon the excitement and success of Borderlands with our second downloadable content offering, Mad Moxxi's Underdome Riot.

This will expand both the single and cooperative gameplay experience with new arenas, expanded weapons storage capacity, and the ability for players to acquire additional skill points and enhance their characters.

2K Games is ramping up for the February 9 global launch of BioShock 2, the sequel to our critically acclaimed title that sold over 3 million units worldwide, and is among the highest rated third party titles on Xbox 360 and PS3.

To make this launch a big consumer and retail event, 2K is executing a multifaceted marketing campaign.

We have a major partnership with GameStop starting in early January, that includes prominent storefront exposure and TV spots promoting our exclusive pre-order program, featuring two special characters that consumers can use in BioShock 2's multiplayer gameplay.

We'll also have midnight openings and first to play events with several of our top retail partners.

We'll air our television spots on the top networks, such as NBC, CBS, Fox, Spike TV, Syfy, TBS, Comedy Central, USA, WWE, and TNT.

2K recently relaunched their award-winning website to offer a new highly interactive and immersive experience.

We believe that our marketing for BioShock 2 will demonstrate our ability to deliver a great campaign that's worthy of a AAA title.

On April 27, Rockstar will launch Red Dead Redemption, the successor to our 2004 Red Dead Revolver.

Developed by Rockstar San Diego in conjunction with Rockstar North, Red Dead Redemption is built on the internally developed Rockstar Advanced Game Engine, or RAGE, and Natural Motion's Euphoria Physics featured in Grand Theft Auto IV, to provide an unprecedented level of realism and atmosphere.

Death in the American West at the Turn of the 20th Century players will assume the role of the partially-reformed outlaw John Marston, as he's focused to cross the frontier in search of former members of his gang.

The game looks fantastic.

I encourage you to visit Rockstar's website and watch the latest trailer to see the incredible detail that's going into this title.

And this week, Rockstar took the game on its second press tour and the response has been overwhelmingly positive.

Media such as IGN, GameStop, and MTV have all praised the game's high production values, vast open world environments, authenticity to the period, and ability to provide an entertainment experience that transcends the notion of what the Western gaming experience should be.

To support the launch of the game, Rockstar announced a pre-ordered program with GameStop, where consumers will have the opportunity to vote for and later use a new special in-game outfit that will uniquely affect how the surrounding world responds to the game's protagonists.

We think this is an innovative program that will further illustrate how we're using digital content to help build pre-launch excitement for our titles.

Rockstar will announce additional promotions with other top retailers in the coming weeks.

In the spring, 2K Sports will release MLB 2K10 across multiple platforms.

The game will feature Evan Longoria, the Tampa Bay Rays' third baseman and 2009 American League Gold Glove and Silver Slugger award winner, as its cover athlete and spokesperson.

Fans were recently given the opportunity to vote online to select the cover for the game, and shows a great defensive image of Longoria that reflects his strong fielding talents.

The team at Visual Concept is developing the game and is committed to improving the quality of our baseball franchise.

Mafia II is scheduled to follow in our third quarter.

The first game from this internally-owned and developed franchise shipped over 2 million units worldwide, and we're very excited about the sequel.

It's worth noting that Mafia II has graced the cover of more than 25 magazines worldwide to date, including Official Play Station magazine in the US.

The title has also been featured on many lists around the world for being one of the most anticipated games of 2010.

Max Payne 3 is planned for release during our fourth quarter fiscal 2010, which runs from August 1 through October 31.

We'll also release the next iteration of our industry-leading NBA 2K franchise.

We're confident that the team at Visual Concepts will continue to raise the bar for excellence in this category, and deliver new innovations in game play to sustain its position as the best basketball franchise in our industry.

In addition, we'll expand our offerings in the casual games market by launching the Misadventures of P.B.

Winterbottom for the Xbox Live Arcade.

Originally created as a student thesis project at the University of Southern California, the game is set in a silent film world that follows the escapades of a mischievous time-bending pie thief.

P.B.

Winterbottom has won several independent awards for its unique art style and innovative gameplay mechanics.

The game underscores our commitment to bring unique entertainment experiences to the market and our pride in nurturing independent creative talent.

Beyond 2K10, this week, 2K Games announced that its next big shooter, Spec Ops: The Line, is currently in development.

The game is a provocative and a gripping third-person modern military shooter that will provide consumers with compelling narrative and heart-pounding action set in the fictional soundstorm devastated landscape of Dubai.

Our first trailer for the game debuted this past weekend during the Video Game Awards on Spike TV, and the response has been very positive.

The trailer was viewed on gametrailers.com by nearly one-quarter of a million consumers within a few days that it was available.

It has the second highest rating of all the trailers shown during the award program.

I invite you to watch it on our site.

The game is planned for release during our fiscal year 2011.

We've successfully achieved one of our key goals, to diversify our portfolio, and our 2010 lineup reflects this positive change in our business.

The progress, however, comes at the price of incurring higher production costs for certain titles.

In addition to our legacy MLB contract issues, this is one of our key areas of focus going forward.

Our goal is to continue to diversify at lower development costs, scale our business for growth, complement our proven IP, and reduce our dependency on any one single franchise.

We're also striving to create exposure to and diversification among platforms, demographics, geographic regions and growth areas.

We remain committed to our strategy of delivering a select portfolio of the highest quality titles.

This year, we'll take greater steps to improve upon our execution and efficiencies to benefit the Company and our shareholders for the long-term.

We must become more consistent in meeting our release dates and managing production costs to achieve the highest possible returns on our creative and financial investments.

That said, we will still consider moving a title if we need to take advantage of a better release window or to ensure the high quality that we want to achieve, as only quality products are performing in the market.

We also need to apply more rigor to our development process without sacrificing our high standards for creativity, quality and innovation.

And we're currently evaluating all costs throughout the organization, including overhead, marketing and development to identify additional potential savings that are not currently factored in our fiscal 2010 outlook.

We think this is achievable and we'll share more on these initiatives in the future.

We're determined to deliver better results and provide value to our shareholders.

We're excited about our releases for the coming year and fully recognize the areas that we need to improve upon in order to achieve long-term success.

We look forward to sharing our progress with you throughout the new year.

I'd like now to turn the call over to Lainie, who will provide additional details on our results for the period, as well as our outlook for fiscal 2010.

Thanks, Ben, and good afternoon, everyone.

Today, I'll review our fourth quarter results, and then provide some details around our outlook for Q1 and fiscal 2010.

Note that all of the numbers we'll be providing today are non-GAAP unless I state otherwise.

Our press release provides a complete reconciliation of our non-GAAP to GAAP numbers.

Net revenue was $343 million in the fourth quarter compared with $323 million a year ago.

Non-GAAP net income was $7 million compared to non-GAAP net income of $1.6 million last year, with non-GAAP earnings per share of $0.09 compared to non-GAAP earnings per share of $0.02 last year.

Our top titles in the quarter were Borderlands, NBA 2K10, Grand Theft Auto episodes from Liberty City, the Ballad of Gay Tony, and Grand Theft Auto IV.

Our GAAP results for the fourth quarter were a net loss of approximately $22 million or $0.28 per share compared with a net loss of $15 million or $0.20 per share in the fourth quarter of 2008.

Our GAAP results included $9.8 million in stock-based compensation expense.

Also, as we mentioned in our pre-announcement earlier this month, we incurred $14.8 million in non-cash impairment charges on our distribution segment, following our annual assessment of goodwill.

In the fourth quarter, we also recorded non-cash tax expense of $4.3 million on a GAAP basis for the cumulative impact of deferred tax liabilities associated with tax-deductible amortization of goodwill.

Our gross margin for the fourth quarter was 31% -- flat with last year.

Operating expenses in Q4 were approximately $97 million, down from last year's fourth quarter.

G&A expenses decreased by $5 million, primarily due to lower professional fees and incentive compensation expense.

R&D decreased by about $1.8 million.

While our studio headcount has grown year-over-year, this is offset by higher capitalization rates.

Depreciation and amortization decreased by $1.3 million, due to lower depreciation on reduced capital expenditures along with last year's sale of certain assets in connection with the outsourcing of our US distribution services.

These decreases were partially offset by an increase in sales and marketing expense, which rose by about $5.9 million.

This is primarily due to the fourth quarter launch of Borderlands, our GTA titles, and other key products, as well as promotional support for our titles already in the market.

Interest and other expense decreased by about $2 million.

We realized a $1.2 million foreign exchange gain in the quarter, which was partially offset by interest on the convert and reduced interest earned on our cash balances.

Moving on to our balance sheet, at the end of Q4, our cash balance was $102 million.

Cash was used in the quarter primarily for inventory purchases and product development costs.

Our accounts receivable balance was $199 million, reflecting the launch of most of our holiday titles right at the end of Q4.

Inventories at the end of the quarter were approximately $94 million, down from last year.

Software development costs and licenses of $243 million reflect the significant development efforts around our AAA fiscal 2010 releases.

Now to our outlook, which is all provided on a non-GAAP basis.

We are reiterating the initial guidance for fiscal 2010 that we provided in early December.

For the full year, we expect a non-GAAP loss per share in the range of $0.40 to $0.60 on $1 billion to $1.2 billion in revenue.

This excludes stock-based compensation expense of $0.46 per share.

Beginning in the first quarter of 2010, we will adopt a new accounting standard that requires convertible debt to be bifurcated into debt and equity components.

As a result, we will begin recording non-cash interest expense on our convertible notes in addition to the interest expense already recorded for coupon payments.

We will report the non-cash portion of the interest expense on a non-GAAP basis, which is $0.11 per share for fiscal 2010.

Our full-year loss includes an estimated non-GAAP loss of $30 million to $35 million or $0.38 to $0.44 per share related to our major-league baseball business.

I'd like to offer some additional color around our guidance, consistent with the comments we provided in our early December call.

We assumed unit sales numbers based on our belief that the challenging economic conditions will continue well into 2010.

Additionally, our release schedule is very critical to our fiscal year results.

Any changes in the timing of releases will impact our financial performance.

And while we continue to be diligent in working to protect our business in advance, with regard to potential bad debt, it is difficult to completely eliminate that exposure.

Another area of variability in our results comes from foreign exchange rates.

For the purpose of guidance, we assume spot rates as of the time we finalized our forecast.

Let me provide some more specific data points on our 2010 outlook.

We expect our total revenue mix to be about 75% from publishing and 25% from distribution.

On a blended basis for publishing and distribution, we expect gross margins for fiscal 2010 to be in the low 30s.

This is up from fiscal 2009, primarily due to the higher proportion of publishing revenue and a greater percentage of sales from internally developed titles.

We expect our split between North America and international revenue to be about 70% to 30%.

Excluding our sports and distribution business, our North America international split is expected to be approximately 55% to 45%.

Within publishing, we expect the revenue breakdown from our labels to be roughly 40% from Rockstar and 60% from 2K.

The 60% from 2K breaks down as follows -- 40% from 2K Games; 15% from 2K Sports; and 5% from 2K Play.

Now to our operating expenses.

We see 2010 G&A levels increasing by approximately 5% in absolute dollars compared to 2009, due to several IT projects to improve efficiency, additional professional fees, and lower incentive compensation accruals in 2009.

Sales and marketing expense will increase significantly to support our strong lineup of key titles planned for 2010.

However, as a percentage of sales, we expect this to increase by just a few percentage points.

R&D is expected to increase by about 5%, primarily due to capitalization rate assumptions as teams finish games.

Depreciation and amortization will grow slightly, as we continue to invest in our development studios.

Our fiscal 2010 guidance reflects tax expense of about $10 million, primarily attributable to our international operations and an estimated share count of approximately 79 million.

We are also reiterating our guidance today for the first quarter.

We expect the non-GAAP loss per share in the range of $0.40 to $0.50 on $210 million to $260 million in revenue.

This excludes stock-based compensation expense of $0.11 per share and non-cash interest expense related to our convertible debt of $0.03 per share.

Let me provide some additional data points on our Q1 outlook.

We expect our revenue mix to be about 55% from publishing and 45% from distribution, due to the seasonal ramp up in Jack's business and our light release schedule for Q1.

The majority of our Q1 publishing revenue is from our Q4 releases and our catalog titles.

We expect Q1 gross margins -- gross profit margins in the mid-20s.

Overall operating expenses will trend up slightly in Q1 as compared to Q1 of last year, primarily driven by increased sales and marketing expense supporting our holiday titles and our upcoming launches.

G&A should be about flat compared to last year.

R&D is expected to be down by about 10%, primarily due to lower production expenses this year.

Our Q1 guidance reflects forecasted tax expense of about $2.5 million, primarily attributable to our international operations and an estimated share count of approximately 78 million.

Lastly, I'll provide some color around the timing of our key releases that we've announced for the balance of the fiscal year.

We expect to release BioShock 2, Red Dead Redemption, and Major League Baseball 2K10 in the second quarter.

Mafia II is planned for the third quarter.

Max Payne 3 and the next iteration of our NBA title are both scheduled for Q4.

We also have some smaller titles planned for release throughout the year, and an unannounced title planned for Q4.

These titles are all factored into our guidance.

We'll have more to say about them in the coming months.

Based on our current release schedule, we expect Q1 to be the low point of the year.

As we've mentioned previously, our 2010 guidance assumes a continued challenging retail environment, which is reflected in the expected unit numbers for our AAA titles.

Our guidance also does not incorporate any additional cost savings opportunities.

I'll conclude by saying that we remain highly focused on executing on our product release schedule, and continuing to identify and implement further areas of cost savings throughout the Company.

Now I'll turn the call back to Strauss.

Thank you, Lainie.

Thank you very much for joining us today and we'll now take your questions.

(Operator Instructions).

Ben Schachter, Broadpoint AmTec.

Hey, guys, it sounds like you're working on a number of initiatives to look at cost savings.

So, the question is -- why give guidance for the full year that doesn't have it in?

I mean, clearly, that's probably going to come.

So why not just sort of say, we're still working on things or here's Q1?

Why do you have confidence that you can look at the full year without the cost savings?

That's the first question.

And then on the retail environment this year versus last, a few points on that.

Any discussion around how the discounting is impacting you guys and other publishers?

And then also curious to know how -- what the change is for online packaged good sales through Amazon and others -- how that's changed this holiday versus last year?

Thanks.

Ben, let me answer your first question on our cost-savings initiatives.

We're still in the process of identifying those initiatives throughout the organization, so there isn't something that we could specifically quantify at this time.

And we feel it's important to give out our guidance for what we know right at this moment; so that's what's included in our numbers.

And we'll update you accordingly as we go through the year.

And this is Ben.

On the retail environment, you know the discounting for our titles we haven't seen, there hasn't been as great as potentially some other publishers.

AAA titles seem to be kind of a safer territory than midline or value-based titles.

And AAA, as you know, is what we do.

And so I think we're kind of in a comfortable zone, although we're watching it very closely; it's obviously kind of top-of-mind issue.

On the online packaged goods sales, we have seen an uptick in Amazon as one of our customers in terms of market share; but I don't know -- I can't give you the numbers sitting here today, and I can't tell you how material it is from an industry point of view.

All right.

Thanks.

Tony Gikas, Piper Jaffray.

Thanks for taking my questions this afternoon.

And as a Minnesota Twins fan, looking forward to seeing Joe Mauer on the cover next year.

Thank you very much.

Could you just give us your -- a little bit of your -- more color on your outlook for this sector next year?

Just on the core business, console and handheld.

Do you see growth in dollars during 2010 on a year-over-year basis?

Second question, is the distribution business consistently profitable right now?

And are you still looking at efforts to sell that business?

How soon could you divest that business?

Thanks.

Tony, on the console in terms of growth in dollars, I think as we indicated on the finance update call, we took down our units across the board for all sorts of reasons, including kind of where console is, where the economy is, where the consumer is.

Now that may end up proving to be conservative.

It's just our view.

If it turns out to be conservative, I think that's good news.

But we did -- but our view on the growth in dollars for the console business is reflected in our guidance, and we did take down numbers across the board.

Strauss, do you want to answer the question about distribution?

Yes, on distribution, yes, it is a profitable business for us.

It is, as you know, a lower margin business.

We've said before repeatedly that it's a non-core enterprise for our business.

And apart from that really, there's not much else to say.

And I guess one last question then -- what's the biggest risk to 2010?

Would it be pricing in the market?

Well, obviously, there are any number of risks when you're in the kind of creative business that we're in.

It's tempting to take for granted through the fact that we turn out AAA titles that rate so well and sell so well to consumers, and just having put out Borderlands, a new franchise for us.

But we don't take that for granted.

It's an incredibly hard thing to do and our creative teams work extraordinarily hard to do it.

And we have an unparalleled hit ratio among third parties in this business.

And it's something that the creative teams work hard for every day, and something we value greatly and creates enormous value here.

The risk in any creative enterprise, though, is the nature of the product performance -- that's your biggest risk.

And then subsidiary to that risk, obviously, is timely delivery of those products; the cost of developing those products; the cost of marketing them.

So those are the risks.

I think our own view is the economic situation really no longer presents a risk because, frankly, we've seen significant bad news in the economic sector and consumer behavior.

And this is anecdotal, and it's opinion; however, we don't expect it to get much worse.

I think also we're not betting on it getting a whole lot better.

So the risk is creative performance and execution.

And that's why we're so focused on continuing to deliver AAA titles.

And we're utterly focused on executing in a timely fashion, a high-quality fashion, and a cost-efficient fashion.

Okay, thanks, guys.

Good luck.

Eric Handler, MKM Partners.

Thanks for taking my call.

Just looking at your gross margins, the 30% you're looking at for next year, given that we're going to see a number of Rockstar titles that have been in development for several years -- and obviously, that weighs on your gross profit margin a little bit -- with these coming out, do you think this sort of marks the low watermark for your gross profit margin for the next several years, GTA here notwithstanding?

And along those lines, can you maybe give us a sense of the number of titles you currently have in production, how that compares to last year?

And how many of those titles have been in production for, let's say, more than two years?

Let me take your first question first, Eric, about the gross margin for 2010.

The margins are affected by the titles that we have coming out during the year, as you mentioned before, the ones that have been in development for a long period of time.

So, that is certainly affecting our margins for next year.

And as -- we're working on developing those titles on a quicker basis in order to bring them to the market and get the margins up higher on some of those titles.

So we'll hopefully see better margins from our publishing business in the next couple of years.

We have about -- for your second question, we have about 33 titles that are in development right now.

And that -- comparable, like year-on-year, I'd say it was probably about 36, around the same amount, about a year ago.

So we continue to focus on a tight number of AAA titles and working to get those titles out on a timely basis.

Edward Williams, BMO Capital Markets.

Just a couple of questions.

Can you give us a little color -- just to follow up on Eric's -- his comments -- on what steps you're taking to ensure that games are released on time, so that we don't see that negative impact on the gross margin?

And then secondly, if you can just give us kind of your perspective as to how the GTA episodes performed, if we look at the packaged goods version of the game versus the downloadable version?

Ed, in terms of creating, getting our titles out on time and on budget is the number one focus of the Company.

I think both labels at this point know that it's kind of my number one focus and I think it's their number one focus as well.

There are games coming out shortly that have had long development cycles.

And those games were developed -- started to get developed certainly before I got here, which gives you a sense for kind of two years or more.

And those games, as they cycle out, my goal would be to make sure that we both have an efficient spend on our R&D and development spending without sacrificing the high quality of our titles.

It's a balance that we need to strike.

It's a balance that any entertainment enterprise needs to strike.

And our commitment to our core business is unwavering, in terms of commitment to quality and excellence.

That said, for sure, we can improve, and we intend to improve.

With respect to the downloadable contents, the downloadable episodes was created as part of an historic strategic partnership with Microsoft.

Both the episodes were critically acclaimed and profitable contributors to the Company, so we're pleased with them.

The launch and the solid ongoing sales of GTA IV -- both we and Microsoft believe there was a big market for GTA IV episodic contents, and some factors affected their performance.

Both were released significantly after the launch of the core unit, or the core GTA IV, which was launched in April of 2008, and therefore, weren't able to leverage GTA IV's initial marketing campaign and initial launch fervor.

Episodes from Liberty City seems to have been most appealing to those that finished GTA IV and wanted more stored-in gameplay, which is a smaller market than originally expected.

There's very little precedence for this type of episodic content at the price point that we offered it.

And so we're confident that these titles will continue to have a long life, just as we've seen a long life from all of our other prior GTA title -- releases.

Okay, great.

Thank you.

Justin Post, Banc of America-Merrill Lynch.

Two things for you.

First, what do you think gets the industry out of the funk that it's in?

Is it really execution and getting titles out sooner?

Or is something going to turn around on sales?

And are you seeing any signs with consoles or anything you can point to, that gives you confidence that we could see a turnaround for you and other companies that are really suffering right now?

And then the second question, is there anything abnormal in the cash flow statement that could make cash flows quite different from your earnings outlook for next year?

Thank you.

Yes, in terms of the industry, I don't want to overstate the case -- there are plenty of consumer businesses that have had a much harder time than interactive entertainment in the last year and a half.

This has been, obviously, a very, very challenging time for the consumer.

We have doubled the unemployment rate that we had pre-crash and a lot of people are having a very hard time.

And this is -- entertainment is a discretionary purchase.

There are, however, the other consumer categories that are more challenged.

What will change things?

Pricing the hardware lower gets hardware into more people's hands; greater penetration gives us a broader installed base to which to sell.

That's a good thing.

Innovations that appeal to consumers on the hardware level, and a number of them are coming out -- Natal and Sony controllers, some examples.

There will be others.

That can appeal to consumers as well.

And anything that makes consumers more excited about the systems, makes them more compelled to buy products.

From our point of view, of course, the thing that matters most is hit product.

Any hit product is always good for an entertainment industry because it creates foot traffic.

So other people's hits actually help us too; they'd sell our catalog -- and our hits sell other people's catalog.

But of course, the most important thing is coming out with terrific titles; bringing them out in a timely fashion; marketing them well.

And that's how we really affect our own destiny.

So that's really the biggest difference.

Don't get me wrong -- I mean, the execution is not only Take-Two's issue; it's other publishers' issue also.

I don't think it's going to get us out of the -- what you described as a funk.

But it does affect the cost of developing games.

It does affect credibility.

And I don't know that it's -- it may not be the industry's focus, but it's certainly my focus and Take-Two's focus.

Okay.

And on the cash flow, is there a reason to think cash flow will be quite different than earnings next year?

There isn't, Justin.

We do expect to use cash in Q1, and for the full year, as we continue to develop titles for our AAA release schedule in 2010 and beyond.

And that, in addition to our losses, is going to have us using cash during the year.

Okay.

And maybe one follow-up.

It looks like there's about $160 million of short-term capitalized software and licenses on the balance sheet, which I'm assuming is the next 12 months.

Can we divide the number of titles by that amount and get a rough estimate of how much you've invested in your lineup next year already?

Is that fair?

It's fair, but it certainly varies by title by title.

So I wouldn't say it's an average over the total amount of products that are in development.

Okay, thank you.

Mike Hickey, Janco Partners.

Thanks for taking my questions.

Curious if you could give us your expectation of when GTA V is going to be released?

And then if you can quantify what your cash burn expectations are for fiscal '10, please?

And then why is your studio headcount going up?

Can you remind me of that?

And then the last question -- on MLB, with your expectation to lose $30 million to $35 million, would it make sense to not even make a game?

Yes.

On just -- I'll take a couple, then Lainie will take your specific financial questions.

You know, Mike, we haven't announced a new release of the Grand Theft Auto franchises and we don't have any announcements to make today.

And on Major League Baseball, obviously, the projected losses are significant and we take them very seriously.

We're doing the best we can to mitigate those and they wouldn't be further mitigated by not putting out a release.

And Lainie will answer your specific financial questions.

Well, for the cash use for the year, we don't provide our guidance on cash flow projections specifically.

But as I mentioned earlier, we do expect to use cash during the year.

And -- but we believe our cash position and our line of credit provides ample capital for us in the near-term, in the foreseeable future.

And in terms of headcount, your question is increases in development?

Is that what it was?

Increases -- you increased -- I believe you said you increased your development headcount through the year.

I'm curious why that is, given the market conditions we see today and looking forward?

Well, it's really -- it's not necessarilyfully based on that.

It's more based on the pipeline of the titles that we have bring to market and the timing of when we expect to deliver them.

Yes, Mike, as you know, we develop most of what we do internally and that's done with people who are on our payroll.

We're fortunate that we're able to attract what we believe is the highest quality talent in the business, as we build our release schedule.

Those SKUs are developed by people largely, not entirely, but largely on the payroll.

The last question -- for your headcount, if you looked at your AAA portfolio of games, what percentage of your headcount is accountable to those games?

I don't have that specific information in front of me and we don't generally share to that specifics, but it is mostly focused on our AAA titles.

Thanks, guys.

Atul Bagga, ThinkEquity.

Hey, thanks for taking my call.

A couple of questions for you guys.

This definitely was a very tough year for packaged goods manufacturers; but if you look at the social gaming companies, like Zynga, Playfish and even free to play online game companies like BreakPoint and others, it seems like that business has been doing pretty well in this year.

Are you seeing any trend?

Is this something -- the core gaming audience -- is that also shifting towards these free to play MMOs?

It's a very good question.

Obviously, everyone is focused on social gaming.

One of our big competitors bought a social gaming company recently.

And I think the largest social gaming company announced a significant private investment at what was reported to be a very high valuation in the last day or two.

It hasn't escaped our attention as well.

We're in the casual gaming business by social gaming, just for those of you who aren't that familiar with it.

These are typically -- typically, although not entirely, distributed via Facebook and other social gaming websites.

They're relatively light applications.

They are typically multi-player.

They tend to evolve quickly and they fall within a narrow range of formats currently.

The monetization isn't typical for the way we monetize products.

We monetize our products by selling them directly to consumers.

So there are a number of elements in the business that are different.

Obviously, we're examining it closely.

Our approach has been to take our franchises and brands, and organically bring them to new platforms.

So we'll be delivering Civilization for Facebook and we're releasing titles for the iPhone and other mobile platforms over time.

We've done handheld titles; we've done downloadable content; we're looking into things like micro payments and the sale of virtual goods.

So, it's an area of enormous interest.

I'm not sure, though, that you've seen a consumer shift.

What's interesting about entertainment businesses, the new entertainment businesses often are additive, not cannibalizing of old entertainment businesses.

And I don't think there's -- I don't think we have a risk of hard-core gamers who buy our mature product shifting to social gaming.

That doesn't mean, though, that it's not an area of interest; it is.

If I may, I just also think, Strauss, that the core -- the challenge for the video -- one of the challenges the video game industry has had is to expand beyond the core gaming community.

And Nintendo made some inroads to that.

And what social network games are doing, gaming companies are doing, are really expanding the audience much more broadly than the core gamer.

If you look at the current offerings, as Strauss said, they're light applications.

That's very different from the deep, immersive entertainment experiences that we offer core gamers.

If you sit here today and look at social gaming companies and look at the applications they have, it's not terribly competitive with what core gamers are looking for in terms of deep, immersive entertainment experiences.

We continue to believe, at least in the near-term, that the core gamer is a great audience for us; it's a great consumer for us.

It matches well with our core expertise, and our core franchises and core competencies.

So we're looking at it closely, as Strauss said, but we believe in the near and medium-term at the very least, that the core gamer is still a very attractive place to be.

Makes sense.

And the second question for you in regard to the hardware -- so when you talk to hardware manufacturers, do you guys -- is there an indication there might be price cuts sometime soon?

And when you're laying out your 2010 guidance, are you factoring in any price cuts from any of the hardware manufacturers?

Yes, obviously, we wouldn't want to speak for them.

There have been price cuts.

And usually at this time in the cycle and this time of the year, there are -- there's discounting and price cuts.

However, we try not to build our expectations based on other people's behavior.

Thank you.

(Operator Instructions).

Arvind Bhatia, Sterne, Agee.

Thank you very much.

Strauss, when you mentioned that you had cut the expectations for almost the entire portfolio based on the market conditions, can you give us a sense of how much this cut was in terms of magnitude?

Is it a 5% or 10% type reduction just based on estimates?

Or was it a more drastic cut?

So that we can, at least in our minds, as the market gets worse or better, then adjust our thinking on the upside or downside potential for the titles.

I appreciate the question.

We didn't really handle it that way, though.

We simply went and reassessed our release schedule and took a look at product by product, and assessed, with the help of our crack sales team domestically and internationally, how we felt we would do.

And then we tried to take a prudent outlook.

We didn't take our prior expectations or as we were developing our planning and just apply a factor to it.

So -- because we tried it -- as much as possible, we try to build our planning, both from a revenue side and a cost side from the ground up, which we think is the most responsible way to do it.

I'm not sure I answered your question, so if you want to refine it and try me again, let me take another crack at it.

Well, Ben had essentially said that you guys did cut across the board.

Maybe talk about the top two or two or three titles or the four major ones -- could you speak, to those at least, what kind of production we had?

No, we didn't -- I don't think -- it wasn't a cut, per se.

And again, we weren't trying to -- I don't think we felt we were being overly optimistic before.

And I don't think we were specifically applying any kind of percentage reduction to our outlook.

We simply were, as we formalized our numbers and as we prepared to offer our initial guidance for 2010, we wanted to do so with a prudent outlook for how those titles would performing.

(multiple speakers) Obviously, by the way, it is our aim to do better, to be clear.

And we believe we have that opportunity; doesn't mean we'll succeed with it, but we certainly feel we have that opportunity.

Right.

I know you -- this is a question for Lainie -- I know you guys don't specifically provide cash flow guidance, but can we get some color on where cash might end up roughly, after the losses plus the investments and gains for the future?

No, we don't share that level of detail on our cash flow projections.

But if you look at what our losses are and then how our cap software grows from year-to-year, it would give you a good basis for understanding where we should end up.

Obviously, what interacts with that is the pace of your development, the pace of your release schedule, and your performance.

Yes.

Great.

Thank you, guys.

Thank you.

Ladies and gentlemen, at this time, there are no further questions.

I would like to turn the conference call back to management.

Well, first of all, I'd like to thank everyone for joining our call today.

I think we all wish we had better news for you.

We take comfort in the fact that we're on the path for our strategy.

And the most important part of our strategy is delivering the top titles in the business with top intellectual property.

And for that, we owe a debt of gratitude to our creative teams who do a phenomenal job, and built this business, and diversified this business; and of late, have made us all really proud in the wonderful titles that they've brought to market.

And we feel phenomenally good about the upcoming releases.

Ben, Lainie, and I, Cindi, Seth, the entire management team here, would like to take a moment to express our gratitude to all of our colleagues at Take-Two and our labels and divisions all over the world.

They've worked so hard this year; they're so dedicated.

They've done such a terrific job, and we really appreciate all of their efforts.

It makes coming to work every day exciting and compelling, challenging, and rewarding.

So, on behalf of the Company, please accept our wishes for a happy and healthy holiday season and the new year.

Thank you.

Ladies and gentlemen, this concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.